The shale phenomenon: fabulous miracle with a fatal flaw

A Chesapeake Energy Corp. worker walks past stacks of drill pipe needed to tap oil and gas trapped deeply in rock like shale at a Chesapeake oil drilling site on the Eagle Ford shale near Crystal City, Texas. The shale formation requires constant drilling to keep up production, (Anna Driver/Reuters/File)

At a petroleum conference held some years ago, at the dawn of the shale rush, Richard Nehring, an industry veteran, was asked whether shale gas was “just a band-aid.

“I hope not,” Mr. Nehring laughed. “Because we need a tourniquet!”

In 2000, the experts were unanimous: American oil and gas production was in terminal decline. By 2015, it was said, we’d need 10 supertankers a day, carrying 12 million barrels of crude, plus 10 billion cubic feet of liquefied natural gas.

Since 2005, however, this scarcity meme has been toppled. Domestic oil and gas production has grown 35 percent in seven years. Natural gas production is at record highs, and oil production has climbed almost 2 million barrels a day, faster here than anywhere on the planet.

The combination of horizontal drilling, hydraulic fracturing, 3D seismic surveys, and other gee-wizardry has produced a near-miracle, which has left experts confounded, politicians exuberant, and journalists suffering from hyperbole.

That is not hype, it is a hallucination. Meanwhile, the oil and gas industry has launched its own euphoric ad campaign, assuring TV viewers that we have a “century’s worth of gas,” an unfounded contention, but one that President Obama seems eager to spread.

To make sense of the shale gale, we must celebrate what industry has accomplished. Then we must grasp how such a fabulous miracle may ultimately prove fleeting.

Historic infusion

The unconventional shale gas and “tight oil” wells we’ve drilled since 2005 are providing the oil equivalent of 6 million barrels a day. The Bakken oilfield in North Dakota, the Eagle Ford and Barnett in Texas, the Haynesville gas find in Louisiana, the Marcellus play in Pennsylvania … these and three dozen other shale plays represent the largest and most rapid infusion of new energy in America’s history. To read the Wall Street Journal, you’d think we’ve won the lottery, and in a very real way we have.

Although America continues to produce lots of conventional oil and gas, imagine for a moment that we were solely reliant on the shale gas and tight oil wells we’ve drilled in the last 10 years. How might we rank?

The tight oil fields we’ve developed since 2003 would make America the world’s 14th largest oil producer, ahead of Norway. The shale gas we’ve brought to market would make America the world’s second largest gas producer, after Russia. Together, the tight oil and shale gas would make the United States the third largest petroleum power on the planet, behind Saudi Arabia and Russia, but ahead of Iran and Canada

This is a marvel, a stunning tour de force, and it’s not surprising that the mainstream media has touted it so heavily. Consider, as just one of many examples, The New Yorker magazine’s 2011 article, “Kuwait on the Prairie,” extolling the Bakken boom.

But when you look more closely, comparing North Dakota with Kuwait is ludicrous. Kuwait claims about 100 billion barrels of reserves; North Dakota may have 10 billion, if that. An average Kuwaiti well produces 1,600 barrels a day, 10 times the output of a typical Dakota well. Kuwait has produced 2 million barrels a day for decades, and will do so for decades to come. North Dakota will be lucky to hit 1 million barrels a day by 2017, before its production tapers off.

Why would production fall in North Dakota? Is something rotten in Bismarck? For that matter, why would a new well in North Dakota produce so much less than an old one in Kuwait?

Herein lies what most talking heads have missed: Having exhausted most of our best petroleum reservoirs, we’ve moved to much worse ones. Thanks to Yankee ingenuity we’ll drill more than 15,000 shale wells this year. That’s the good news. The bad news is that shale formations are tighter than tombstones, and as a result all these wells have an abbreviated lifetime.

Articles about shale gas tend to feature a roughneck in a hard hat. But brawn long ago surrendered to brains in the oil patch. This is the planet’s foremost knowledge industry where RAM is prince, and geeky geologist and engineer, the shale frackers, are king.

The sexy rocks in petroleum geology have always been porous sandstones and limestones, easy formations eager to surrender their goods. In contrast, black shales, the original wellspring of all petroleum wealth, have been neglected, even though geologists knew them to be everywhere. Yes, you could drill them, and a few did, but generally you were pouring money down a rat hole.

Shales are stubborn, stingy, and impermeable. Their physics are torturous. The pore throats, or passageways, of some shales are barely bigger than a single methane molecule. Until very recently, trying to harvest gas from shale was like trying to breathe through Saran Wrap, an exhausting enterprise with no upside.

Today, for $5-10 million, you can drill and “frac” an excellent well that will initially produce 1,000 barrels, or 6 million cubic feet, a day.

But typically that well will age rapidly. Many good wells, not to mention the dogs, will be exhausted within 15 years. The decline rate of a shale well is breathtaking, a Wile E. Coyote-like plunge from cliff top to oblivion. In the Bakken and Haynesville plays, production can fall 80 percent within 24 months. By the end of four years, your prize well is on its way to stripper-well status.

As a landmark report released this week by Post Carbon Institute shows, the math is brutal. But its full implications are hidden when a shale play is brand new, as essentially all of them were in 2003. Throw 200 rigs at a virgin shale, and steep growth curves are a given. But stop drilling new wells, even for a month, and the growth abruptly ends. Stop drilling for year, production will fall 30 to 40 percent.

The higher production rises in any given shale play, the more new wells are needed to “feed the tiger,” as insiders put it. Boosters tend to ignore this grim reality, but a child might ask, what happens when you run out of places to drill?

What happens has happened. A shale play in eastern Montana, Elm Coulee, provides an augury of what we can someday expect in the Bakken field next door.

About 10 years ago a drilling boom in Elm Coulee enabled Montana to double its oil production. But the inventory of new drilling locations was quickly depleted, and as soon as it was, the state’s production fell sharply. With shales, the flip side of exuberance is exhaustion.

Shale gas vs. tight oil

So far, we’ve lumped shale gas and tight oil together, but there is a critical distinction between the two. Shale gas has created a glut, driving natural gas prices down, saving a typical family hundreds of dollars each year, enabling us to close archaic coal plants, and reinvigorate our fertilizer, petrochemical, and steel industries.

An additional 2 million barrels a day of American tight oil, on the other hand, hasn’t budged the world oil price or brought drivers relief at the pump. It has reduced the trade deficit, but only by lubricating a bizarre dynamic: American motorists are paying nearly twice as much to use 10 percent less oil than we did five years ago so that Chinese motorists can use twice as much as they were. How do you like them apples? Well, get used to it, because we may have to wring another 3 million barrels a day out of US consumption by 2030, if the Chinese and Indians continue to outbid us for limited oil supplies.

How much shale can we spin into gold? Time will tell. Production in some shale gas plays has already peaked, in part because of a collapse in natural gas prices. On the other hand, there’s room to grow production in the Marcellus, Permian Basin, Eagle Ford, and, for a while longer, the Bakken.

The Marcellus is forecast to become the largest natural gas field in our history. It may produce enough gas to meet 15 percent of American demand for decades to come. But despite the hype about “Saudi America,” our tight oil boom is likely to be much more fleeting.

Scary math

We’ve been told this is a new era. And that’s true, it is. Since your cushy way of life is increasingly dependent on stingy rocks, you should be thankful that the industry geeks have unlocked the dregs.

So, yes, celebrate the shale miracle, but forswear the hype. If geology is destiny, decline rates are its script. The American future isn’t a romance with abundance, it’s a plea bargain with depletion.

Tonight, there will be more rigs rotating right in Texas than in all of Europe, Africa, and the Middle East combined. Texas is 40 times larger than Kuwait. But that tiny country needs just 35 rigs to produce 2 million barrels a day whereas Texas needs 800.

How high would oil prices be if Americans weren’t using 2 million barrels less oil each day than we were in 2007? Lord only knows. The irony is that even as we’ve become less hooked on crude, we’ve become more addicted to drilling.

As we move from a reliance on conventional oil flowing freely from highly porous reservoirs to a dependence on shale plays, whose permeability is a million times less, the future course of America is no longer indicated by a compass needle pointing west, but by a drill bit pointing down.

Ten percent of the Lower 48 has been leased by oil companies. That’s more acreage than we plant in corn and wheat. Oil and gas extraction is now the dominant land use on the continent.

In short, shale plays are a peculiar sort of blessing. For sure, they’ve given us a staggering amount of new energy. Simultaneously, they’ve hijacked our energy future, chained us to a drilling rig, and thrown away the key.

Sorry JohnB, you missed the point. Fact is that the decline rate is so high, the number of new wells so ‘necessary’ that many US gas producers are on the verge of bankruptcy (the price being what it is with all this new resource). The industrial ‘correction’ is likely to be rather messy, as will its consequences be on the general population. This is fool’s gold.

The fact that frakked wells deplete rapidly just means we have to drill and frack more and more wells. And that means good paying jobs for more and more Americans in the oil patch.

Bor on Tue, 26th Feb 2013 12:40 am

Sorry Plantagenet,

With EROEI 2.5 to 1 shale oil will not do the trick. There is already more than 70,000 wells. More than a half of them are depleted already. A well is getting depleted in a few years. I do not want to imagine 500,000 or even 1,000,000 wells. It is total idiocy, my friend.

Jobs? Yes. A lot of drilling jobs.

I’m amazed that you cannot understand that this is the Ponzi scheme.

dave thompson on Tue, 26th Feb 2013 1:02 am

Good article.

BillT on Tue, 26th Feb 2013 1:51 am

“… The American future isn’t a romance with abundance, it’s a plea bargain with depletion. …”

That sentance sums up the idea of oil forever. John and Planet are blind to the reality that the cost of rigs is the important item here, not jobs. Costs are going up with oil prices. Soon each well will cost $10M, then $15M, then drilling will stop because the price of the product will reduce demand to the point that they cannot make a profit due to lack of sales at $200+/bbl..

Oil has about peaked economically, meaning that it has reached the point where demand is contracting even as they are producing more. Western economies are all in depression. They are breaking under the cost of energy already. Another $150 oil spike may bring down the world financial system like it almost did in 2008.

But, aren’t the Chinese buying more and more? Yes, but…they are storing more and more also. They are buying it with petrodollars, which they know will soon be worthless. They are stocking up on everything they can get in anticipation of that day when the Petrodollar collapses and the whole world economy resets. They are turning that oil into a modern society and yes, empty cities, which, I think, they expect to fill in the near future and they are building them now when it is possible and relatively cheap.

cipi604 on Tue, 26th Feb 2013 3:51 am

The problem with shale is that the industry has to grow at an exponential pace.

There is no need to fall out over shale gas and shale oil. I think it is abundant and low cost to produce and will be around for >100 years. Others don’t, they think its a Ponzi Scheme

The American model of rewarding the land owner is the key to understanding the amazing innovation which produces more gas from fewer wells.

Lets see who is right! By 2015 it will be crystal clear, we should also know how many hundreds of years of shale gas we have in UK by then.

energy investor on Tue, 26th Feb 2013 10:56 pm

JohnB.

Sad to say the UK is finished and despite money printing, is entering the first global great depression (GD1) several months ahead of most other countries in the OECD. The Olympics allowed a short period of self delusion, but reality came in Q4, 2012 and will intensify in Q1, 2013.

The shale gas illusion bubble will pop in the USA by year end and few wells will be drilled in the UK.